The entropic nature of money

Recently I met a fascinating and brilliant businessman.  A serial entrepreneur who has made money in consumer products, real estate, hedge funds and now in private equity.  It was a fascinating and wide-ranging discussion.  Truly, a robust business conversation with someone who loves business but also knows how hard it is to be successful.

Unless you associate with physicists, the laws of thermodynamics and the concept of entropy rarely come up.

However, this gentleman made the point that money was entropic... over time it dissipates.  Those that are not creating wealth play a defensive game of preservation.  Much like a drop of dye spreading out in a large body of water, wealth eventually fades.  It might take several generations for significant wealth to be diluted, but eventually it happens.

One often wonders why entrepreneurs that have created $50 million, $100 million, $1billion in wealth stay on offense.  The first reason...it is who they are.  It is in their DNA to build and seek to add value.  Wealth creation is the byproduct of that effort.  Secondly, they instinctively realize the entropic nature of money.  They know what took twenty years to build can be wiped out quickly if one is not vigilant.

Business is similar to sports.  When one is aggressive, takes chances and keeps on the attack it is surprising how much can be accomplished, and how players of lesser ability can win over more talented opponents.  But when one gets ahead and adopts a cautious "playing not to lose" approach, that is when you see defeat snatched from the jaws of victory.  You see this all the time in football when the team with a lead goes on a prevent defense.  Generally, the only thing it prevents is victory.

Andrew Carnegie said, "Put all your eggs in one basket, and watch it very carefully".  That focus and a relentless approach is the path to success.  Very few have hedged their way to success or great wealth.

In this challenging economy, the temptation for businesses is to hedge their bets by trying to go after multiple markets hoping that one will prove to be a winner.  If you are large enough and have sufficient resources, that strategy might play.  Most companies don't have that luxury.   For the majority, now is the time to do a gut check and put all their power behind a focused strategy.  It is a bold and scary thing to do.  However, it might be what gets you through this downturn.